28 August 2020
Indonesia

This article is an update to previously published draft Bill of the new Mining Law

On 10 June 2020, the Indonesian government promulgated the much-discussed Law No.3 of 2020 on the Amendment to Law No.4 of 2009 on Mineral and Coal Mining (“New Mining Law”).  The New Mining Law introduces numerous changes to the 2009 Mining Law and answers some of the industry’s concerns raised since the enactment of the 2009 Mining Law and its implementing regulations.

The finalisation of the draft bill for the New Mining Law was announced on 13 May 2020 by the Indonesian House of Representatives, when the country was in the early stages of adapting to the COVID-19 pandemic.

While the overall response from the industry is positive as the New Mining Law promotes business certainty and may help create new jobs, there remain claims that the New Mining Law is sidelining the environment, local communities and regional administrations.

In this article, we will discuss some of the key highlights of the New Mining Law and our take on such matters.

Centralisation of mineral and coal control authority

The New Mining Law shifted the authority to control mining and coal from the Governor/Regional Governments to the Central Government (through the Ministry of Energy and Mineral Resources) instead of through regional governments to streamline the process.  Under the New Mining Law, the Central Government is authorised (after consultation with the House of Representative (DPR)) to determine the amount of production, sales, and price of metal mineral, certain types of non-metal mineral, or coal (due to national interest).

Although the regional government’s authority to issue mining business licenses no longer exists, certain functions will remain with the regional government, such as the authority to issue people’s mining permit (izin pertambangan rakyat).

Under the new centralised system, it is hoped that overlapping licensing issues and time-consuming bureaucracies (which are typically found in practice) will be obsolete from the previous Mining Law and its implementing regulations.

Licenses

The mining business activities are carried out based on business licenses from the central government.  These include (i) business identification number, (ii) standard certification, and/or (iii) permits/licenses.

While the 2009 Mining Law only classified three mining permits: Mining Business Permit (“IUP”), People’s Mining Permit and Special IUP, the New Mining Law introduces additional mining permits and licenses.  A complete list of the mining permits under the New Mining Law is set out below:

  • IUP;
  • IPR;
  • Special IUP;
  • Special Mining Business Permit as a Continuation of Operation of Contract/Agreement (Post Contract IUPK);
  • Rock Mining license (SIPB);
  • Assignment License (license for radioactive Mineral business in accordance with the provisions of the laws and regulations in the nuclear sector);
  • Transportation and Sales License;
  • Mining Services Business License, and
  • Mining Business License for Sales.

Whilst the Central Government has the authority to issue the above-mentioned licenses, such authority could be delegated to Provincial Regional Government.

Guarantee on contract extension

The New Mining Law provides companies with Contract of Work (“Kontrak Karya or KK”) or Coal Contract of Work (“Perjanjian Karya Pengusahaan Batu Bara or PKP2B”) a guaranteed extension in the form of a Special Mining Business Permit as a Continuation of Operation of Contract/Agreement (“Post Contract IUPK”), under certain requirements and in observation of efforts to increase state revenue (e.g. through the rearrangement of taxes and non-tax revenues and the area for the Post Contract IUPK).

KK and PKP2B which have not been granted with any extension are guaranteed with two extensions in the form of a Contract IUPK, each for a 10 year period.  On the other hand, KK and PKP2B which had been granted with one extension are guaranteed a second extension in the form of post contract IUPK for a period of 10 years.

In addition, when applying for a Post Contract IUPK, the relevant KK and PKP2B companies can also apply for additional area outside of the IUPK Area for its Production Operation activities in order to support its mining areas.

Divestment obligation

Under the New Mining Law, holders of Operation Production IUP or IUPK whose shares are owned by foreign shareholders are required to divest the shares of its foreign shareholders up to 51% in tranches to the central government, regional governments, state-owned enterprises (“SOEs”), regional-owned enterprises (“BUMD”), and/or national private companies. If private sales are not successful, the divestment will be carried out through the Indonesian stock exchange.

At a certain period, the maximum foreign shareholding in the relevant IUP/IUPK shareholder must not exceed 49%. The timing as well as the procedures to implement this obligation will be regulated further in a government regulation.

The divestment obligation appears to be consistent with currently prevailing divestment obligation under the implementing regulations of the 2009 Mining Law, however the New Mining Law does not specify the tranches and the applicable percentage for each tranche.  This begs the question on whether the government is planning to amend the current divestment period (which begins at 20% on the sixth year and ending at 51% on the 10th year) under the New Mining Law’s implementing regulations or the cumulative divestment threshold of 49% at maximum within five years of the operation of the mining activities that is being regulated.

Transfer of mining permit

Under the 2009 Mining Law, transfer of IUP/IUPK is restricted, however, an implementing regulation of the 2009 Mining Law allows the transfer of IUP/IUPK to companies whose 51% or more shares are held by the IUP/IUPK holder.

The New Mining Law now allows the transfer of IUP and/or IUPK with a prior approval from the Minister of Energy and Mineral Resources.  The approval may only be granted if the holder of the IUP or IUPK is able to meet a number of requirements, which include having completed the exploration activities and fulfilling certain administrative, technical and financial requirements.

The New Mining Law does not elaborate how the transfer is carried out between the transferor and transferee, i.e. whether it will be carried out by way of contract or otherwise.  Further provisions relating to the transfer of IUP and IUPK will be regulated further with or based on a government regulation as an implementing regulation of the New Mining Law.

Share transfer

Under the implementing regulations of the 2009 Mining Law, a prior approval on a proposed share transfer in an IUP or IUPK holder from the Minister or the governor (as applicable) is required.  Pursuant to the New Mining Law, as certain authorities of the regional government have been shifted to the Central Government, the authority to issue an approval on a proposed share transfer lies with the Minister.  Shares referred here are shares that are not listed in the Indonesian stock exchange.

Similar to the transfer IUP and IUPK, the approval for the transfer may only be granted if the holder of the IUP or IUPK is able to meet a number of requirements, which include having completed the exploration activities and fulfilling certain administrative, technical and financial requirements.

The New Mining Law does not extend to share transfers at level(s) above the direct shareholders of the IUP and IUPK holders.  Further provisions on the procedures to transfer the IUP and/or IUPK will be set out in a government regulation.  As at the date of this article, it is unclear as to when the government will issue such government regulation.

Mining road

The New Mining Law obligates and encourages mining license holder to utilise mining road in the implementation of mining business activities, such mining road be self-built by the holder of IUP and IUPK or cooperate with other entities such as: (i) other holders of IUP and IUPK who builds the mining road, or (ii) other parties who owns a road that may be intended as mining road, after meeting mining aspects of safety.

Corporate social responsibility

The New Mining Law obligates the IUP and IUP holder to allocate funds for community development and empowerment programs with a minimum amount determined by the Minister. This is considered as an improvement as there has not been any clear instruction on how much fund is to be set aside by mining companies for CSR activities.

Failure to comply with this obligation, the New Mining Law stipulates that the Minister will impose administrative sanctions to such IUP and IUPK holder. The New Mining Law is also adding ‘fine’ as a possible form of administrative sanction.

Further provisions on this obligation will be further regulated under the Government Regulation.

Post-mining reclamation obligation

The New Mining Law requires the Operation Production IUP or IUPK holders to carry out reclamation and post mining activities at a 100% success rate prior to relinquishing or returning any part of the mining permit area (“WIUP”) or special mining permit area (“WIUPK”) to the Government. Former IUP or IUPK holders whose IUP or IUPK has expired are also subject to this obligation and place post-mining guarantee fund.  If the area in question meets the criteria for use, the placed reclamation and/or post mining funds will be claimed by the Central Government in accordance with the prevailing laws and regulations.

Applicable criminal sanctions

The New Mining Law amended a number of criminal sanctions previously provided under the 2009 Mining Law, as follows:

Conducting mining business without a permitmaximum of five years imprisonment and a maximum fine of IDR100 billion
Submitting inaccurate report on purpose and provide false informationmaximum of five years imprisonment and a maximum fine of IDR100 billion
IUP and IUPK for Exploration holders conducting production operation activitiesmaximum of five years imprisonment and a maximum fine of IDR100 billion
Accommodating, utilising, conducting processing and/or refining, development and/or utilising, transporting, selling mineral and/or coal not originating from the holders of IUP, IUPK, IPR, SIPB or other relevant licencesmaximum of five years imprisonment and a maximum fine of IDR100 billion

 

The New Mining Law also introduces the following criminal sanctions:

IUP, IUPK, IPR, or SIPB holders transferring its licences without consent from the Ministermaximum of two years imprisonment and a maximum fine of IDR5 billion.
IUP and IUPK holders whose IUP or IUPK had been revoked or had expired not conducting reclamation and/or post-mining activities and/or provide reclamation and/or post-mining activities reserve fundsmaximum of five years imprisonment and fine for a maximum of IDR100 billion.

 

As mentioned above, further implementing regulations will be issued which would hopefully shed further light on the amendments set out under the New Mining Law.  We are monitoring this closely and will provide detailed insights once the implementing regulations are issued.

If you have any questions or require any additional information, please contact Afriyan Rachmad or Anggi Yusari of Roosdiono & Partners (a member of ZICO Law).

This alert is for general information only and is not a substitute for legal advice.